Transcript of Conference Call on Germany's Article IV Release

March 30, 2010

International Monetary Fund
Washington, D.C.
Tuesday, March 30, 2010

MS. LOTZE: Good morning everybody or good afternoon, wherever you are. This is Conny Lotze from the External Relations Department, and I have with me here the Mission Chief to Germany, Juha Kahkonen; and the Deputy Mission Chief Helge Berger, and they are here to answer your questions. You have had access to the staff report and the Public Information Notice.

Mr. Kahkonen will make some opening remarks, and then we’ll turn to your questions.

MR. KAHKONEN: Thank you. Given that you have the documents already, let me be very brief.

The German economy is back on its feet, but we think the recovery is not going to be business as usual. As in many countries, it’s likely to be moderate and subject to risks. Our growth projection for this year is 1.2 percent. In this situation, the policy challenge for the German government is to continue nurturing the economy with policy support until the private sector is growing in a self-sustained manner.

At the same time, there’s a need to prepare to withdraw the support policies that have been in place during the crisis. What this means for various policy areas is first that in the fiscal policy area, the budget for 2010 should continue to provide stimulus for this fragile recovery. We would expect the economy to firm up next year, though, and therefore there’s a need to prepare for measures to consolidate on the fiscal side to meet the very appropriate medium-term consideration goals by the government. But the measures have yet to be specified—and one of our recommendations is to do that.

In the financial sector, we think the help of the banking sector is now better overall than during the crisis, but there are pockets—especially the Landesbanken sector—that are still ailing, and there’s a need for action to address these problems. There’s also a need to strengthen the financial sector infrastructure in terms of putting in place an effective bank resolution regime. And on banking supervision, we do support the government’s plans to make to Bundesbank the sole prudential bank supervisor. This should enhance accountability and speed up enforcement.

In the structural area, we think the Kurzarbeit-scheme was very effective in maintaining employment during the crisis, but we think over time it should be—the (inaudible) support -- should be withdrawn to prevent it from becoming an impediment to longer-term growth. Also in the structural area, we think Germany has an opportunity to boost domestic sources of growth through further reforms in the labor market and also in the services sector, ideally simultaneously. These reforms by boosting domestic growth—sources of growth –could then help Germany move to a more balanced growth model, and that would also contribute to lowering imbalances within the Euro area and globally. Thank you.

QUESTIONER: Actually, I have two questions. Looking at your growth projections, it looks like they are a little bit lower than the projections by the IMF in the interim update. Can you give me an explanation for that?

And then my second question concerns these financial risks you mentioned concerning the banking sector—Landesbanken, et cetera—and I was wondering whether you might elaborate. Are these risks bigger than in other countries or if this just a German situation or is it something that you find all over the industrialized world right now? Thank you.

MR KAHKONEN: Thank you. On the growth numbers, yes, we had a somewhat higher projection for this year’s earlier, but when the weaker-than-expected last quarter outcome for 2009 came out, we lowered our projections correspondingly.


MR. KAHKONEN: Now in the banking sector, there obviously have been and continue to be weaknesses in many countries. In Germany, the Landesbanken have been a weak spot and our view is that they really lack in many cases a viable business model with us, encouraged them to take undue risks, and this need for further consolidation. But let me ask Mr. Berger to elaborate further.

MR. BERGER: Yes, just to confirm the first answer, it’s essentially carryover. We kept the quality growth profile constant in 2010, but the last quarter of 2009 was so weak that the adjustment followed. Financial services—clearly is fairly similar across countries, but there is still remaining vulnerabilities. The German system doesn’t stand out there, however, what’s particular about Germany is that the Landesbanken are in that pocket in which many of these losses have accumulated, and I think this is why we have to focus on them and do so in our report.

QUESTIONER: I was just wondering, reading what you’ve got in your report on tax cuts and how they have to be carefully designed. Could you maybe tell us a little bit more about what you’d like to see the German government do? And in the box that you’ve got on the “cash for clunkers” scheme, how much do you really expect that to affect domestic demand in the coming year?

MR. KAHKONEN: Starting from the “cash for clunkers” scheme, we think it maybe had temporary effects if advance purchases of cars at a time when demand was overly weak, and so it was a useful measure. But the scheme, after expiration, is unlikely to have a lasting effect.

Under tax cuts, our basic message is two-fold: One, in principle, if there is fiscal room, there would be advantages to tax cuts that would be tailored to boosting growth, however, tax cuts—any tax cuts—would need to be done in a fiscally responsible manner. And given the need to start fiscal consideration—likely next year, if the current projections hold—there’s a bit of tension and because of this tension, our advice would be that if any tax cuts are undertaken next year, there would need to be offsetting measures of the medium term to allow the government to stay on the consolidation path.

MS. LOTZE: Okay, if there are no more questions, then we’ll end this conference call here. I just wanted to point out that there will also be an interview with Mr. Kahkonen and Mr. Berger on the IMF website. Thank you very much for participating and see you soon. Bye.


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